IUL VERSUS ROTH IRAS IUL2022IULvRoth indexeduniversal.life 800-743-9221 [email protected]
TABLE OF CONTENTS 04 09 10 12 13 Saving for Retirement with an Individual Retirement Account (IRA). Understanding How Indexed Universal Life (IUL) Insurance Works. Features and Benefits that Could Be Obtained Via Indexed Universal Life (IUL) Insurance. Where Could Indexed Universal Life (IUL) Fit in a Retirement Savings and Income Strategy? Does Indexed Universal Life Make Sense for Your Retirement Plan? 2 IUL2022IULvRoth [email protected] • indexeduniversal.life • 800-743-9221
A worry-free retirement typically starts with having one or more streams of income that can be relied upon for life. It doesn’t matter how long that may be or what happens in the stock market, with interest rates, or in the economy. In addition to simply receiving an income, there are other factors to consider when making withdrawals in retirement, such as taxation. The reason is that excessive taxes can negatively impact the net spendable income you receive. Instead, you can use that amount for purchasing goods and services you need in retirement. With that in mind, it is not necessarily always the best idea to take tax-related incentives in the present, but rather to wait until withdrawal. It’s especially the case if future income tax rates are expected to be higher than they are currently. One method that is being used by more investors today is the Roth IRA, due in large part to the tax-free withdrawals that it allows. But while Roth IRAs can provide you with a long list of enticing benefits, there are also some potential drawbacks. That’s why it is essential to understand better how Roth IRAs work and know some of the alternatives that could be used in place of or conjunction with this tax-advantaged financial vehicle. One potential option is indexed universal life (IUL) insurance. The Best Results Come From Expert Advice. Discover How You Can Benefit From An IUL Expert. IndexedUniversal.Life 3 IUL2022IULvRoth [email protected] • indexeduniversal.life • 800-743-9221
Even if you participate in an employer-sponsored retirement savings plan, such as a 401(k), it is possible that you may also have personal accounts set up. Individual retirement accounts (IRAs), are tax-advantaged accounts that people often use to save and invest for the future. These accounts are also sometimes referred to as individual retirement arrangements. There are two types of IRAs available to investors today: traditional and the Roth IRA. Saving for Retirement with an Individual Retirement Account (IRA). The Best Results Come From Expert Advice. Discover How You Can Benefit From An IUL Expert. IndexedUniversal.Life 4 IUL2022IULvRoth [email protected] • indexeduniversal.life • 800-743-9221
Traditional IRA With traditional IRA accounts, your contributions can typically go in pre-tax, which means that there is no income tax due for the amount of the contribution(s) in the year(s) they are made. In turn, this can result in less income tax being due, or alternatively, a larger tax refund amount for the years in which you make a traditional IRA deposit. How much of the contribution is pre-tax can depend on whether or not your (and/or your spouse’s) employer-sponsored retirement plan covers you, as well as the amount of your income for the given year. The growth that takes place inside of a traditional IRA account is tax-deferred. It means that there is no tax due on the gains until the time of withdrawal, which might not take place until many years in the future. Consequently, this could allow the account value to grow and compound exponentially, especially over a long period. Because of the pre-tax contributions and the tax-deferred growth, 100% of traditional IRA distributions are taxable. The reason is that none of these dollars have been subject to taxation yet. In addition, the IRS mandates that at least a minimum amount of distribution must start when the traditional IRA account holder is age 72. If these required minimum distributions (RMDs) are not made each year, there will be an IRS penalty of 50% of the amount that should have come out of the account, and this is the case for every year that the full amount of the required minimum distribution (RMD) is not withdrawn. On the other hand, if withdrawals are made from a traditional IRA account before you turn age 59 ½, taxes will be levied on these funds, and you will also incur an additional 10% “early withdrawal” penalty from the IRS. As a result, it can leave you less net spendable income. 5 IUL2022IULvRoth [email protected] • indexeduniversal.life • 800-743-9221
Year Rate (%) Year Rate (%) 2018-2021 37% 1950 84.36% 2013-2017 39.6% 1948-1949 82.13% 2003-2012 35% 1946-1947 86.45% 2002 38.6% 1944-1945 94% 2001 39.1% 1942-1943 88% 1993-2000 39.6% 1941 81% 1991-1992 31% 1940 81.1% 1988-1990 28% 1936-1939 79% 1987 38.5% 1932-1935 63% 1982-1986 50% 1930-1931 25% 1981 69.125% 1929 24% 1971-1980 70% 1925-1928 25% 1970 71.75% 1924 46% 1969 77% 1923 43.5% 1968 75.25% 1922 58% 1965-1967 70% 1919-1921 73% 1964 77% 1918 77% 1954-1963 91% 1917 67% 1952-1953 92% 1916 15% 1951 91% 1913-1915 7% Source: Inside Gov Roth IRA Roth IRAs have many similarities to traditional IRA accounts, particularly how the accounts are structured and the amount of maximum annual contributions. However, there is a big difference in how the two types of IRA accounts are taxed. For instance, a Roth IRA account is funded with after-tax dollars. So, no break is given on income taxes in the year(s) of contribution. However, the “tradeoff” is that the earnings in a Roth IRA account accumulate tax-free. Moreover, the withdrawals from a Roth IRA also come out tax-free, regardless of the then-current income tax rates. It can be extremely beneficial, as the United States has been in a historically low-income tax rate environment for many years, and taxes are likely to go up in the future. Top Federal Income Tax Rates 1913 – 2021 6 IUL2022IULvRoth [email protected] • indexeduniversal.life • 800-743-9221
There are some other key differences, too, between traditional IRA and Roth IRA accounts. For example, there are no required minimum distributions (RMDs) with Roth IRAs, even after you have turned age 72. Therefore, your money can remain in a Roth IRA and continue to grow tax-free indefinitely. The IRS has put in place some income limits to open and fund a Roth IRA. So, based on how much you earn and how you file your income tax return, you may or may not be allowed to open and fund a Roth IRA account directly. Traditional and Roth IRAs both have annual maximum contribution limits. For 2021, investors age 49 and younger may contribute up to $6,000. Those aged 50 and older may contribute an additional $1,000 of “catch-up” contribution, for a total of $7,000. Tax Filing Status Modified Adjusted Gross Income (MAGI) in 2021 Roth IRA Contribution Limit Married filing jointly (or qualifying widow or widower) - Less than $198,000 - $198,000 to $207,999 - $208,000 or more - $6,000 (or $7,000 if age 50 or older) - Begin to phase out - Ineligible for making direct Roth IRA contributions Married filing separately (and you lived with your spouse at any time during the year) - Less than $10,000 - $10,000 or more - Begin to phase out - Ineligible for direct Roth IRA contributions Single, head of household, or married filing separately (and you didn’t live with your spouse at any time during the last year) - Less than $125,000 - $125,000 to $139,999 - $140,000 or more - $6,000 (or $7,000 if age 50 or older) - Begin to phase out - Ineligible for making a direct Roth IRA contribution) Roth IRA Income and Contribution Limits (for 2021) Source: irs.gov The Best Results Come From Expert Advice. Discover How You Can Benefit From An IUL Expert. IndexedUniversal.Life 7 IUL2022IULvRoth [email protected] • indexeduniversal.life • 800-743-9221
It is essential to note that even if you earn “too much” money to open and directly fund a Roth IRA, you may still be able to take advantage of the many tax-related benefits that these types of accounts have to offer. Some investors use the “back door” IRA strategy, which entails opening and funding a traditional IRA and then transferring it over to a Roth. Many rules must be followed regarding funding and withdrawing from certain types of retirement accounts. Therefore, talking with a financial advisor who specializes in retirement income planning could help you determine the best course of action for you and your specific circumstances and your short- and long-term objectives. Traditional IRA Roth IRA Contributions Pre-tax After-tax Annual Maximum Contribution Limits (for 2021_ $6,000 if age 49 or younger $7,000 if age 50 or older $6,000 if age 49 or younger $7,000 if age 50 or older Withdrawals 100% taxable Tax-free Required Minimum Distributions At age 72 No RMD requirements Early Withdrawal Penalty 10% penalty (in addition to tax) on funds that are accessed before age 59 ½ 10% penalty on earnings that are accessed before turning age 59 ½ (contributions may be accessed penalty-free) Traditional versus Roth IRAs 8 IUL2022IULvRoth [email protected] • indexeduniversal.life • 800-743-9221
An indexed universal life (IUL) is a type of permanent life insurance policy offering death benefit protection and a cash value component. The cash value return is based mainly on the performance of one or more underlying market indexes, such as the S&P 500 and the Dow Jones Industrial Average (DJIA). When the underlying index (or indexes) that are being tracked perform well during a given policy period (such as in a contract year), the cash value of the IUL policy is credited with a positive return, typically up to a preset limit. Depending on the IUL policy, there may be caps, participation rates, or spreads limiting its upside return potential. In return for this limit on the upside performance, if the underlying index(es) performs poorly, no loss is incurred in the policy’s cash value. Therefore, both the principal and the previous gains are protected in any stock market or economic environment, which might seem like a “best of both worlds” scenario for many investors. In addition, as with other types of permanent life insurance policies, the cash in an IUL plan grows tax-deferred—there is no tax on the gains until or unless you withdraw them. Moreover, tax-deferred savings could exponentially grow and compound if held for an extended period. When considering the purchase of an indexed universal life (IUL) insurance policy, there are some critical factors to consider, mainly how the return on the cash value is determined. Many IUL policies use criteria such as caps, participation rates, and spreads when calculating the cash value’s return. Cap – As it relates to an indexed universal life (IUL) insurance policy, a cap is an upper limit on the amount of return credited to the cash value account in a given period. For instance, if the cap on a policy is 7%, and the underlying index attained a 10% return in a given time frame, the IUL policy’s cash value would be credited with 7%. In return for this limited upside, though, the cash value of an IUL policy will not incur a loss of principal (including any previous gains), even if the underlying index performs in the negative. Participation Rate – Several indexed universal life (IUL) insurance policies may place another type of limit on the upside return potential, known as a participation rate. Here again, as a “tradeoff” for this, there are no losses incurred in the underlying index being tracked incurs a loss during a given period. A participation rate refers to how much of an index’s return will be used to determine the return on the IUL policy’s cash value in a given period. For example, if an indexed universal life (IUL) insurance policy uses an 80% participation rate and the underlying index attains a 10% return in a given contract period, then the return on the account will be 8% (80% of 10% is 8%). In addition to a participation rate, an indexed universal life (IUL) insurance policy may also include other limits on its upside potential, such as a cap and a spread. Spread – With an indexed universal life (IUL) insurance policy, another factor may also impact the crediting method for the cash value—a spread. A spread will determine how much of the underlying index’s return is credited to the policy’s cash account. For example, suppose an IUL policy has a spread of 4%, and the underlying index attains a 10% return in a given period. In that case, the cash value of the IUL policy will receive a return of 6% (10% minus 4% equals 6%). Moreover, other factors could be mixed in, such as caps and participation rates. Understanding How Indexed Universal Life (IUL) Insurance Works. 9 IUL2022IULvRoth [email protected] • indexeduniversal.life • 800-743-9221 The Best Results Come From Expert Advice. Discover How You Can Benefit From An IUL Expert. IndexedUniversal.Life
In addition to the opportunity for higher cash value growth, there are other benefits that you may also be able to attain through an indexed universal life (IUL) insurance policy. So, when comparing the benefits of an IUL policy to those of a Roth IRA, you should consider the following: Tax-Deferred Growth: Indexed universal life (IUL) insurance allows the cash account to grow on a tax-deferred basis. It means that there is no tax due on the gain until the time of withdrawal, providing the ability to compound exponentially over time, especially compared to a taxable account, with all other factors being equal. Let’s say if tax-deferred accounts, such as traditional IRAs and 401(k) plans, have reached their annual maximum contribution limits. In that case, an IUL policy can allow you to continue expanding your tax-advantaged retirement savings. Principal Guarantees: Permanent life insurance policies like IUL provide several types of guarantees. The cash value will be credited with a guaranteed minimum floor amount, even if the index(es) being tracked incur a loss in a given contract period. These policies also guarantee that a death benefit will be paid to one or more named beneficiaries if the insured dies while the IUL policy is in force. However, this is not the case with a Roth IRA. For instance, if the Roth account is invested in equities like stocks or mutual funds, and these financial vehicles incur a loss, then both principal and previous gains could be lost. Therefore, there is no minimum return guarantee or guaranteed downside protection with a Roth IRA account. Unlimited Contributions: Employer-sponsored plans and individual retirement accounts (IRAs) usually mandate a maximum annual contribution limit. In turn, this can reduce the amount of tax-advantaged savings that you have. However, permanent life insurance like IUL can help you make unlimited contributions into an account that grows on a tax-deferred basis. Moreover, you could also access tax-free in the future, even if you have already “maxed out” the contribution limit on these other plans. Flexibility: Indexed universal life (IUL) insurance policies provide flexibility regarding how the cash value return is credited. In addition, as with regular universal life insurance policies, IUL policyholders may decide (within specific guidelines) how much of the premium will go towards the death benefit and how much will go towards the cash value component. No Impact on Social Security Retirement Income Benefits: In some cases, such as generating too much income from other sources, Social Security retirement benefits may be taxable. Growth on an indexed universal life (IUL) policy and the funds accessed via a tax-free loan count against these income thresholds have no impact on Social Security benefits. Tax-Free Access to Cash Value: Most “traditional” retirement savings plans allow pre-tax contributions and taxdeferred growth. So, upon withdrawal, 100% of the funds you access in retirement may be fully taxable at a future rate that is currently unknown. Tax-free withdrawals are allowed from certain types of accounts, such as Roth IRAs and 401(k)s, and via some types of life insurance policy loans. IUL policies fall into this category. These loans can provide you with more net spendable income in retirement for the goods and services you need (and want) to purchase. In addition, while the insurance company will typically charge an interest rate on loan taken against an IUL policy, the loan does not necessarily have to be repaid during the insured’s lifetime. For instance, if the insured passes away while there is still a loan balance, funds from the death benefit are simply used for paying it off. The remainder of the proceeds will then be paid (free of income tax) to the policy’s beneficiary(ies). Features and Benefits that Could Be Obtained Via Indexed Universal Life (IUL) Insurance. 10 IUL2022IULvRoth [email protected] • indexeduniversal.life • 800-743-9221
Advantages Drawbacks Death benefit protection Premium / cost of insurance could increase in the future Flexibility (in terms of premium amount, due date, and allocation between insurance and cash value—depending on the particular policy) Withdrawals may be taxable Opportunity for higher cash value growth (plus a guaranteed “floor” return) Limited upside potential due to caps, participation rates, and/or spreads Tax-deferred growth Surrender charges in early policy years Some penalty-free liquidity (after the first contract year, many IUL policies allow penalty-free withdrawals of up to 10% of the account value—even during the surrender charge period) May be charged interest on policy loan(s) Protection of principal in any stock market or economic environment May be able to “customize” the policy using riders No income limits No annual maximum contribution limits No required minimum distribution (RMD) rules at any age May take tax-free policy loans (with a remaining loan balance paid via the death benefit if the insured dies) Protection from bankruptcy and/or creditors (in some states) Pros and Cons of Indexed Universal Life (IUL) Insurance The Best Results Come From Expert Advice. Discover How You Can Benefit From An IUL Expert. IndexedUniversal.Life 11 IUL2022IULvRoth [email protected] • indexeduniversal.life • 800-743-9221
Even though many advantages are associated with indexed universal life (IUL) insurance, this financial vehicle is not the right fit for everyone. However, if you are looking for the following features in your financial or retirement plan, then an indexed universal life (IUL) insurance policy could be a viable option for you: Death benefit protection Opportunity for higher gains (versus whole life and regular universal life insurance policies) Additional option for tax-deferred growth (even if an IRA and/or employer-sponsored retirement plan annual contributions have already been maxed out) No annual maximum contribution limits The opportunity to protect principal while at the same time possibly generating a higher return than other “safe” money options like bonds and certificates of deposit (CDs) Cash value withdrawal options (and the policyholder can often access up to 10% of the contract’s value without penalty, even during the surrender charge period) Ability to access cash tax-free via policy loans Penalty-free waiver if diagnosed with a terminal illness and/or require long-term care That being said, there are also some important factors to consider before purchasing an IUL policy, as some of the following items could be considered as potential drawbacks: Limited upside gains (due to caps, participation rates, and/or spreads) Surrender charges (at least in the early years of the policy) Premium could go up in the future Possible IRS 10% early withdrawal charge (if funds are withdrawn before the policy holder turns age 59 ½) Where Could Indexed Universal Life (IUL) Fit in a Retirement Savings and Income Strategy? 12 IUL2022IULvRoth [email protected] • indexeduniversal.life • 800-743-9221
Depending on your retirement objectives, risk tolerance, and time frame until retirement, indexed universal life (IUL) insurance could be a beneficial financial vehicle to include in your overall retirement planning. Before you make a long-term commitment to IUL, or any financial product or strategy, it is recommended that you consult a retirement planning specialist knowledgeable about life insurance and where it may or may not fit in with your strategy. If you would like to set up a no-cost, no-obligation meeting with an advisor, either in person, over the phone, or online virtually, please feel free to contact us by calling 800-743-9221 or send us an email via [email protected] When it comes to retirement savings and income, there are many alternatives, so it is easy to become overwhelmed when trying to piece together a plan that is right for you. We look forward to helping you design your ideal financial future. Does Indexed Universal Life Make Sense for Your Retirement Plan? The Best Results Come From Expert Advice. Discover How You Can Benefit From An IUL Expert. IndexedUniversal.Life Disclosure: Content is not personalized financial advice and should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed. Tax and legal information provided is general in nature and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. Indexed universal life insurance may not be suitable for you depending upon your investment objectives, risk tolerance, financial situation, and liquidity needs. Accessing policy cash value through loans and surrenders may lead to a permanent reduction of the policy’s cash value and death benefit, which may lead to a potential lapse of the policy. There may be tax penalties for distributions prior to age 59 ½. Insurance product guarantees are subject to the claims-paying ability of the issuing companies success. Working with a highly-rated adviser also does not ensure that you will experience a higher level of performance. Please contact the adviser for more information regarding the criteria for any awards or rankings noted. Ratings can be based on client evaluations, professional activity and promotional fees paid by the professional. 13 IUL2022IULvRoth [email protected] • indexeduniversal.life • 800-743-9221
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